Navin Fluorine International Limited (532504) Earnings Call Transcript & Summary

A warm welcome to all the participants. First of all, thank you very much for taking call on a very short notice. I'm also joined by our CFO, Mr. Ketan Sablok; and SGA, our Investor Relations Adviser for this discussion. We are pleased to inform you all that Navin Fluorine today announced that it has entered into a $410 million contract with a global company for manufacture and supply of a high-performance product in the fluorochemical space. This agreement is Navin Fluorine's largest contract to date. It is testament to our deep and wide fluorine experience and our strength in successfully scaling up of complex chemistries. This contract is for a period of 7 years, and this product is not part of Navin Fluorine's existing product portfolio. This CapEx and the project will be executed through our wholly-owned subsidiary, Navin Fluorine Advanced Science Limited. Navin Fluorine through Navin Fluorine Advanced Science Limited will be investing $51.5 million, which is about INR 365 crore at a current exchange rate, to set up dedicated manufacturing facility for this product; and approximately $10 million, which is INR 71 crore at current exchange rate, to set up a captive power plant. The facility will be located at Dahej in the state of Gujarat and will be funded through a mix of internal accruals and debt. The supplies are expected to commence from Q4 of FY '22. This is beginning of our entry into higher-value HPP segment, which is high-performance product segment, and we shall continue to add more products in this segment in future as well. Before we start with Q&A, I would also like to take this opportunity and brief you all on the impact of coronavirus on Navin Fluorine. As you all know, fluorspar is one of the key raw materials for us. Most of our fluorspar comes from non-Chinese regions. Less than 20% of the fluorspar is from China and that quantity can easily be sourced from other countries as well. So let me end my part by also informing you that Board of Directors has today declared second interim dividend of INR 4 per share, the face value of INR 2 each, which comes to about 200% for the financial year '19-'20. Now we can open the floor for Q&A. Thank you.

[Operator Instructions] The first question is from the line of Sudarshan Padmanabhan from Sundaram Mutual Fund.

Congratulations on this agreement. Sir, my question is on the profitability and ROC of this undertaking that you have taken. So would it -- I would assume that given that it is high performance, I mean, what could be the margins over here? Would it be better than the company average -- in line with company average? And what is the kind of target ROC that we see from here?

So we constantly keep looking for opportunities to improve our operating margins as well as ROC, and this probably is one such opportunity. But now, right now, for guidance purpose, we would -- it would be fair to assume that the profitability as well as ROC will be in line with what our average EBITDA margin and ROC has been.

And this sales of $410 million over 7 years, would it be staggered or would it be equally staggered? I mean how should we assume that the project offtake will happen from fourth quarter?

Yes, I think the assumption going into this project is that it will be fairly evenly staggered. But as it happens in any project -- in any product, you always have some initial hiccups, both on the commercial as well as technical side. So we would assume that in the first year it will probably be a little lower, but then it would pick up and it will remain fairly constant beyond that.

And this CapEx that we had said, I mean, I would assume that we already have the land in Dahej, so it wouldn't include the land. So I mean if we're just looking at plant and machineries, then how much would the CapEx be on that side?

So yes, the land is already with us. We already have all the initial approvals. Those are all available with us, including the environment clearance. As you know, a few months back, we actually went to the Board and got an approval for OSBL. So the entire OSBL actually takes -- has taken care of -- in that particular CapEx. If you look at the CapEx that we have just now announced, that includes -- there are 2 parts to that. The first part is approximately about $51.5 million, which is primarily for the process plant, so it includes all the equipment, et cetera, of this particular plant; and about $10 million for a captive power plant. So just to clarify, when I talked about OSBL, OSBL basically means the investment that goes into development of infrastructure, admin building, overall affluent treatment facility, et cetera. So these are investments which are not any project specific. These are specifically done for the land, to ready the land for this project and also for the projects that will later happen in that land.

Next question is from the line of Abhijit Akella from IIFL.

First of all, congratulations on the deal win. I just wanted to understand, number one, this -- one, CapEx itself is worth more than INR 400 crores, and we had previously indicated a plan to invest about INR 450 crores over the next 3 to 4 years. So whether there's additional spending in, say, the Specialty Chemicals segment or the Refrigerant segment that we should expect going forward? And then second, just in terms of this new segment that you've now forayed into, to whatever extent possible, if you could please comment on exactly what the nature of this segment is? I mean, high-performance product, is it in the polymers area or some kind of specialty chemicals and the customer profile? Whatever you could disclose would be helpful.

Yes. So there are 2 parts to this question. The first part, which talked about the investment. If you see the earlier announcement which we made in December of 2019, that talked about 2 parts. One was the investment of about INR 90 crores, which we had got the Board approval for, and that approval we had received on the basis of [ future ] investments that will happen in that piece of land for various projects. And we had mentioned that point in time that the overall investment will be in excess of INR 450 crores. So that was just a plan. That is not something that we had received an approval for. And as we had mentioned that point in time, we will keep taking to the Board each of these CapEx plans. And as and when we get approvals, we will come to you and make the specific announcements. So in that regard, this is the first announcement that we are making. And as you rightly said, there possibly would be announcements to be made in other business units. So as and when we are ready, we will make those announcements in the following quarters. The second part was respect to HPP. So if you have heard our commentary over the last few quarters, we have been saying that we see opportunities beyond the 4 traditional business units that we have. So what we are trying to do is that we're trying to align our overall business around certain set of applications and then define them around either product offering or service offerings. So there are set of these new higher-end applications that we are seeing. You must be obviously reading some new trends that are coming out. Now those are presenting completely new set of opportunities for application of fluorine. So what we have decided is, rather than putting it into any of our existing traditional business unit, it probably makes sense to create a new vertical and put these opportunities under new vertical. Primarily because, a, these product are meant for completely new segment which we have never played into. Also, these are actually new segments for even the market. So these are not your old traditional segments. And even from our side, it requires a completely different mindset in terms of how you approach this segment, both technically as well as commercially. And hence, we decided to set up a completely new business unit. As we -- there are lot of confidentiality issues because of which, unfortunately, we cannot disclose more information at this point in time. As we get close to commercialization, we would be happy to share more information in terms of specific applications, et cetera. But we can guarantee you that these are completely new set of applications, completely different from even what you just now -- the examples that you gave.

Okay, that's great. And just one last quick follow-up, if I may. The technology for this product, has it been developed in-house by Navin or is it being shared by the customer? And then what's the debt-to-equity mix you're envisaging for this project? And lastly, any tax benefits that the subsidiary, NFASL, will enjoy?

So the first part of that question I will take. And the other 2 questions that you asked, I will have Mr. Ketan Sablok, our CFO, answer to that. As far as the technology is concerned, this technology has been offered to us by the partner. So it is basically a transfer of the technology. So we basically have royalty-free access to the license agreement -- [ through ] license agreement, we'll have access to that technology, which is what we will be using. And then obviously, we'll be working as one team to then further enhance that particular technology. But the base technology? Being offered to us by our partner.

Yes. And Abhijit, on the financing of the project now. As this project is spread over a period of almost 2 years, so we envisage that the intent is that the internal accruals and the cash generation that we are presently doing in the company would be good enough to fund this entire project. And we'll see, as we move further into the years when the CapEx is getting set up, if required, we'll -- we won't shy away from that. But as of now, the intent is to spread it over the cash accruals that will come in. And the tax benefit that you had talked about, I think that's not the main reason why we are getting into this project. Yes, the tax, whatever it is, will flow in as per the rules that are there. So -- and any which way, we will be setting this up in the new subsidiary which we have announced. So that will be coming up in Dahej. So whatever the tax benefits accrued to the subsidiary will come into this project.

Yes. So -- just so, is it the 15% new rate that's applicable to this or will you continue under the old regime itself?

No, so whatever is the new rate, that will be applicable to this.

[Operator Instructions] The next question is from the line of Manoj Garg from White Oak Capital Management.

Yes. Congratulations. [ Well, Radhesh ], clearly mentioned that this is first of the deal which you have signed, and we hope to have many more in the ensuing quarters. So just want to understand like when you've indicated in terms of the segment high performance and you said that there are few more deals which you are working. So if you can elaborate a little bit more? And what kind of visibility we have for any such -- more kind of deals going forward?

No. So one of the things that we mentioned was that we -- as we had earlier mentioned, we see opportunities beyond the traditional 4 BUs, which is now getting translated into these specific opportunities. And what we have said is that we will continue to add more products. So we are actually seeing opportunities, so we will develop those opportunities. And once those opportunities are developed till a particular stage is when we will actually start getting into specific contracts. I think it's little too premature to comment on specific contracts or specific deals at this point in time. I think what is most important for us is that we have a deal on the table today which is a very important opportunity for us, not just in terms of the value of the contract but also what more we can do with this specific opportunity that we have on the table. The focus of the organization will be to execute this successfully first, rather than to keep chasing more newer opportunities. So first, we'll focus on this at least for the next few quarters as we plan and get this opportunity on track. And while we do that, we will continue to develop the other opportunities that we are seeing.

Sure. And maybe just -- I just follow-on. How does you feel this contract is different than your current business, given that the technology has been shared by the customers, and it's more like kind of a contract manufacturing, isn’t it?

So in a way, if you actually look at -- lot of things that you do can -- if we just try to simplistically put a label, it can actually -- a lot of what we do can actually come under contract, research or manufacturing. But what you will have -- what we will have to understand is 2 things. A, what are the applications these are going into? What kind of specific expertise it requires to develop these opportunities? And what more can we do with these opportunities? For example, this product that we are talking about here has got multiple applications, can go into multiple products. One of the things that we will also be looking at, at a later stage, is also to develop India market for this particular product. So this is not similar to our traditional CRAMS model. There are lot of aspects of this particular contract, this particular opportunity, which are beyond the traditional CRAMS model. And hence, we are not putting into that CRAMS bucket. Also, if you look at our CRAMS business, that is specifically focused on the Life Science segment, so where we work with specific innovator drug companies. So it's a very, very different business, requires very different set of skill sets, et cetera.

[Operator Instructions] The next question is from the line of Anand Bhavnani from Unifi Capital.

Many congratulations for the deal. I just wanted to understand whether we would be the sole supplier for this particular product? And what were the [indiscernible] eventually end up winning this? I understand there would have been a lot of competition to get such a lucrative contract. So if you can just comment on these 2?

So as far as the sole supplier is concerned, we believe so. We are -- other than the partner themselves, we are the sole supplier. And as far as the competition, we are not exactly aware of the process that the partner actually ran. Since we've actually started our engagement with the partner, we know that they -- we are the only ones that they have been talking to. As I mentioned earlier, I think this particular contract is clearly the testament to our experience and strength in successfully scaling up of these complex chemistries, and it also reinforces the trust that some of these global customers have in Navin Fluorine's capabilities. But other than that, it's very difficult for us to comment on in terms of who else they were talking to, et cetera. Since we have started serious engagement with them about 6 to 8 months back, we know that we were the only ones that they were talking to.

Wonderful. And with regard to CapEx, just wanted to understand, since you...

Sir, sorry to interrupt you. I'll have to ask you to come back in the question queue for a follow-up question. [Operator Instructions] Next question is from the line of Sanjesh Jain from ICICI Securities.

Most of my questions are asked. One, just clarification. In the opening remark, we said that this is a product. So I believe this is one product, right? Or it's a portfolio of product?

So this is one product for which we have the contract. There is an intermediate that is involved here. That intermediate can be used to manufacture this product, that intermediate can also be used to manufacture some other products. So currently, the opportunity on the table is for one product. There is an opportunity at a later stage for us to expand that to a smaller portfolio around this product.

But the intermediate product which we are manufacturing remains the same?

The intermediate remains the same. That's correct.

So we will be manufacturing one simple product, if I need to understand that way.

Yes. So first of all, it's not -- we will not -- it's not a question of manufacturing one simple product, the multi-stage synthesis. And so we will be manufacturing the intermediate and also manufacturing the final product. And even to make the intermediate, some of the critical building blocks that are required are also manufactured by us.

So we will start from molecule stage to the end product and will we supply the end product to the customer? Is this how we need to understand? Or we will supply the API and the final product will be manufactured by the company? How should I look at it?

So when you say API, it typically is active pharmaceutical ingredient. So this is...

No, no. So AI kind of an intermediate tool, just...

This is -- yes, so this is also not an AI because AI typically goes into agrochemical. This is a final product. And as you rightly said, we will be actually starting from the fundamental molecule, making all the steps right up to the final product.

Okay. That's helpful. One just follow-up question on the coronavirus, which we said that -- so how much of our -- apart from fluorine, is there any other molecule which we source from China? Or if you can give us what percentage of our COS is -- COGS is dependent on China?

Yes. So like all the other companies, not just in clinical space, lot of other segments also, we source a lot of raw materials from China. We don't really supply lot into China. So from the demand perspective, we don't have any issue -- much issue there. So the biggest raw material that we consume is obviously fluorspar, which is where the opening commentary was, that our dependence is very minimal. On the other raw materials, yes, there is a this one. I don't have the exact percentage, but there is a dependence on China, but we are -- because the situation in China is constantly evolving, so we are also trying to make an assessment as to how the things are going to look for us. What we know for sure is our Q4 is definitely not impacted at all because of China, and in Q1, there is a possibility that we might get affected. But right now...

So for Q4, we are covered in terms of inventory?

Q4, we are completely covered. Q1 also we are covered to a great extent.

Next question is from the line of Suraj Nanda from ICICI Prudential Life Insurance.

Sir, I have 2, 3 questions. So I just wanted to understand, is this a generic or a patented product? The second question is, are there any more suppliers who are already making this product? And what kind of market -- what is the market size or potential for this product which you are talking about?

So due to confidentiality reason, it will be difficult for us to disclose a lot about this product, but we can clearly say that it's not only the product is patented, but the technology is heavily patented. In terms of other suppliers, the partner himself manufactures this product. Other than that, we are not aware of any other supplier.

And the market potential, sir? What is the -- is it already in the market or kind of -- we'll go forward and look at it when the potential in the market for the product comes up?

The market already exists. And currently, there is a strong tailwind that this particular product is seeing.

Okay. And what stage of development are we in this product? Or is it kind of we are taking the product development technology from the company which we have brought the project from?

So as I have mentioned earlier, we have signed a license agreement with the partner, and that license agreement gives us access -- royalty-free access to the technology which has been developed by them, technology developed and scaled up by them.

Okay. So the entire technology and everything is being provided by them?

Yes. The base technology is provided for them. And at a later stage, we will together work as one team to bring in further improvements in that.

So in terms of product development, what kind of additional value addition are we adding to it? Is there anything or we are just getting the technology and we'll kind of implement it?

No, at a early stage, there won't be significant -- there won't be much value addition from our side. It will basically be more on the execution part.

Okay. So it's kind of an outsourcing kind of a thing?

Sir, sorry to interrupt you. I'll ask to come back in the question queue for a follow-up question. Next question is from the line of Vihang Subramanian from Samsung Asset Management.

Congratulations on the deal as well. Just one thing, you happen to mention that your partner himself currently makes this. So just wanted to know, is it that -- that basically the production that your partner is currently doing is getting transferred to you? Is that how this deal has come up?

No. As I mentioned earlier, this product is actually seeing strong tailwinds because of which there is a need for new production capacity, and the partner has hence decided to have this particular extra capacity that they need with us instead of doing it themselves.

Okay. Okay, got it. And just a follow-up on that. Do you probably see this like as a function of diversifying away from China in some sense for your partners? Like for instance, say earlier they would have given this additional capacity to China; today, they're giving it to you because they want to diversify away. Is that the right understanding?

So we obviously will not know what their thought process was. The only thing that we know, that for the last 8, 9 months, that we are having serious engagement with this partner, we are the only ones that they've been talking to. Other than that, it's very difficult for us to know what exactly was going on in their mind.

Next question is from the line of Amar Mourya from ALFAccurate Advisors.

Sir, 2 questions from my side. First is, even though the product is new, but is this existing relationship converting into a new product line or this is purely a new relationship which we had created?

See, as a part of normal business, there are number of customers that we keep talking to. Lot of them are new, lot of them are existing, some of these are evolving, et cetera. So there's just one of them. It will be very difficult for us to qualify the relationship, et cetera, because then it will be relatively easy for anyone to start guessing who the company is, et cetera. So we just don't want to steer the conversation in that direction. But it's one of the companies who have -- who has actually known us for many, many years and over a period of time has got tremendous amount of confidence in our ability. So I think that basically...

Okay. And second question. Is this going to be a continuous kind of a production or a batch production? And if batch, then what would be the time frame and the size for these kind of products? Because this is the kind of high performance product.

This is a continuous production facility.

Next question is from the line of [ Siddharth ] from Anvil Stock Broking.

Congratulations on getting this deal. I just wanted to understand, if we have the bandwidth in terms of capacity and management to take on similar-sized contracts, if they come out in the next couple of years, are we thinking along those lines? Or this is the focus as of now? I just wanted to understand your perspective on this.

So for us, disciplined execution is always going to be focus. So bandwidth is something that -- the development of bandwidth is something that -- it's a constant process. We have been focusing on that for the last few years and we continue to focus on. If we continue to find opportunities which meet all our qualitative as well as quantitative requirements, we will definitely pursue those.